Five years after the 2010 Dodd-Frank financial reform act, several of its controversial corporate governance provisions on executive compensation continue to wend their way through the system.
In late April the Securities and Exchange Commission (SEC) approved a proposal requiring publicly listed US companies to formally disclose how their executive compensation relates to profitability, and how the metric compares to similar firms. The rule calls for a new table in companies’ proxy statements detailing total compensation paid to the principal executive, total annual shareholder return and total return for peer group companies—among other metrics. It’s expected to bring a degree of standardization to this area, although some experts doubt its overall effectiveness.
“I think the impact will be relatively small, as I don’t see investors spending a lot of time looking at it,” says Alan Johnson, managing director of Johnson Associates, a compensation consulting firm. “But it will be one more headache for companies, and it will require some additional expenses to comply with.”
The SEC says the rule “would better inform shareholders and give them a new metric for assessing a company’s executive compensation” policy. The comment period for the proposal runs through July 6.
This so-called “pay-for-performance” push echoes another much-publicized and hotly contested provision on “pay ratio” that’s been proposed but not adopted and that would require public companies to disclose the ratio of their CEO’s earnings compared with what their median worker makes.
“The driver behind both is political, to embarrass companies that have difficult labor relations,” says Johnson. “If you are in tech or financial services, where people are generally well paid, none of this will resonate, but it might if you are in businesses like fast food or retail, and the press will pick up on it.”
Both regulations take aim at what’s perceived as growing income inequality in the nation and outsize executive pay, which have become hot-button issues since the financial crisis in 2008.
Going forward, the public relations risk might convince companies to modify their behavior. “Firms will try to design compensation packages that ex post ‘look good’ in terms of the relation between ‘actual’ pay and performance,” says Fabrizio Ferri, associate professor of business at Columbia University. But pay for performance is an easier concept to grasp than to quantify.
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